Chart Pattern Trading
Continuation formations are patterns that regularly occur in the middle of price moves. Probably the most common chart pattern trading examples are the flag and the pennant. Both are accompanied by falling volume and simply reflect traders taking a break from the recent trend. They are useful in that their setups and breakouts offer good short-term, low risk trading opportunities. They also act as excellent measuring tools as they can accurately project price objectives. “The flag flies at half mast” was one of the first adages I recall learning from an old time chartist. What that means is that a flag or pennant will form at the mid-point of a price move. The chart below shows a small pennant formation in July 2013 Natural Gas.
Note to Self – “Rain Makes Grain”
One of my first trades was during my summer break from college of my freshman year. The corn market had been in a serious downtrend into July as crop conditions continued to improve through out the summer. Some heavy rains over the weekend had done some minor damage in Iowa and Southern Illinois, which put a bid in the corn pit Monday morning. Being young and naive I sensed a bottom in the corn market and went long, expecting the damage to significantly affect the crop. The market traded in a narrowing range for the rest of the week and I was successful at buying the breaks to price support, and building my position. Over the weekend I bragged to my friends how well I had traded and the riches I was sure to accrue the following week. Well, Monday morning the market gapped lower and broke hard. I held on to my position not willing to admit I was wrong and take the big loss. The market trended lower most of the week and I continued to hope that the corn market would come back, but to no avail.
Thursday night after finishing up with back office work I walked to my car in an absolute downpour. I knew with the rain that corn would again be sharply lower the next morning. As I crossed La Salle Street a panhandler approached and asked me for a buck. I turned to him and said “Buddy, are you kidding me, I’m long corn!” The look on his face was priceless and I still wonder today what he thought I meant.
Needless to say I blew out of my long corn position the next morning with a hefty loss. It was at that point I realized I needed to get a better handle on how the markets worked. Not long after I bought a book on technical analysis and began charting the markets. One of the first patterns the book talked about was the flag and pennant formation. It only took me an instant to realize that the narrowing range during which I built my long corn position was probably the most perfect flag formation you could ever imagine. It was at that point that my life long fascination with technical analysis began.